At present, when people are well informed about different types of loans like personal, business, education loan et al, loan against securities is still a less known option. Loan against securities scheme, also referred to as LAS scheme is a popular practice by which an investor can pledge securities in his/her portfolio to a bank in order to avail funds.

Almost all the private banks and PSUs offer such loans. Loan is granted when an investor pledge his/her shares to a bank. The list of approved securities against which LAS can be granted varies from bank to bank. Banks have now started expanding the financial assets that can be used for this option.

Mainly the following securities can be pledged for loan:

• Demat Shares

• Mutual Funds Units

• Fixed Maturity Plans (FMP)

• Exchange Traded Funds (ETF)

• Insurance Policies

• Savings Bonds

• Government Securities

The shares which are taken into consideration for loans by the banks are very liquid, from high quality companies and highly valued securities. The amount of loan depends on valuation of shares, margin allowed by the bank, our ability to service and repay the loan, borrower’s past credit history or CIBIL score and other conditions as applicable from time to time.

However, you cannot get a loan against all shares as banks usually have strict rules for shares of the companies that can be pledged against the loan. This is because if you own the shares of a company not listed with one bank you can go to another. At regular intervals, banks keep changing the shares against which loans can be taken. This is primarily done to ensure the stability and liquidity of shares which can be pledged.

You can avail loans on your shares which are in physical form also. However, the interest rate will be higher and also the loan amount as a percentage of the value of the share will be lower. Generally physical shares are accepted in market lots only. There are banks which require that you convert your physical shares into dematirialised form and then only you can apply for a loan.

Advantages of loan against securities:

1. Liquidity without selling your long term investments.

2. You will be charged interest only on the amount you withdraw from the account and for the span of time the fund is utilised.

3. You require no personal guarantor for loan against shares.

4. You get steady cash easily at the time you need it most.

5. You will not be devoid of the benefits as a shareholder.

6. Loan amount ranges from Rs.1 lakh to Rs.10 lakh (for physical) and up to Rs.20 lakh (for Demat).

On the whole, loan against securities is yet another good option to create new assets out securities you hold. It helps you keep your portfolio intact and avail cash against it anytime you want. Right time to go for LAS is when you need instant liquidity. When you chose this option, make sure you pay it back at the right time. Also, you should go for LAS only after comparing its interest rate with other options such as personal loans or other need specific loans as interest rate depends on the prevailing rate in the market.

Disclaimer:

1. Views as are mentioned in the article are personal views of Author and nothing to link with Co., its Director and Employees.

2. All investments are subject to market risk and you need to consult your financial advisor/consultant before investment.